Sunday, December 15, 2019

A Previous AIM Small Cap Equity Holding: Centennial Resource Development, Inc. Class A (CDEV, $3.41): “A Development on the Decline”

 Centennial Resource Development, Inc. Class A (CDEV, $3.41): “A Development on the Decline”
By: Riya Hegde, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


Centennial Resource Development, Inc. Class A (NASDAQ: CDEV) operates as an oil and natural gas company. It focuses on the development of unconventional oil and liquids-rich natural gas reserves in the Permian Basin. The company was founded in 2014 and is headquartered in Denver, CO.

• CDEV derives its revenues through three segments: Oil, Natural Gas Liquids and Natural Gas. In FY 2018 79.7%, 13.3%, and 7% of revenues came from these three segments respectively.

• The oil and natural gas industry is cyclical which causes the volatility of commodity prices. This has quite a large impact on Centennial because these lower prices can decrease revenues on a per unit basis while also decreasing the amount of oil, natural gas, and natural gas liquids that the company can produce economically, reducing their reserve quantities.

• Predominance in the Delaware and operational flexibility.

Key points:

Centennial is definitely feeling the effects of volatile commodity prices as expressed through its decline in stock price. Management has many goals set in place for the future of the company, but this doesn’t seem to be having much of an effect on the price of their stock. They’re focusing on securing a financial position in response to volatility. They aren’t looking forward to their prospects and responding to their continuous decline in stock price.

There are various things management has expected and are expecting for CDEV in 2019 and moving forward. The total capital budget has been reduced 15% in 2019 to now $845 million and is looking to be even lower by the end of FY 2019. This is due to Centennial looking to reduce their operational costs as well. Centennial expects to increase crude oil production by approximately 12% in 2019. They plan to keep a flexible approach in regard to their operational activity in response to volatile commodity prices. Although takeaway capacity has had its effect on crude oil prices, the deals that Centennial has structured with BP and ExxonMobil in the Permian basin positions them well in order to scale their own production while maintaining their lower operational costs. CDEV has about 85,000 net acres in the Delaware Basin, which gives them a predominance of about 80%. They plan to operate between four to five rigs in Reeves County in the Delaware Basin while continuing to develop and test additional zones, in response to their expectation to increase oil production.

Although the decline in their stock price isn’t specific to Centennial, and many companies in the industry have experienced price declines due to the simple volatility in the industry, Centennial just doesn’t seem to be responding well to the decline in stock price and making positive change. They have missed their earnings for the past three quarters in a row and their P/E ratio is under the market average due to their lack in EPS growth. The company could benefit with more attention paid to the price decline and actions taken to increase this which would benefit the overall financial health of the company.

What has the stock done lately?

For the past month the price of Centennial has been relatively flat and not seeing much change except for its 52-week low on December 3 of $2.92. The company has missed its earnings for the last three quarters and the next earnings report date will be on March 2nd, 2020.

Past Year Performance: 

In the first half of 2019, CDEV’s stock price fell around 31% due to oil prices being volatile. Additionally, when the company decided to pull back in average daily oil production in 2019 and this news came out, there was a one-day plunge in their stock price. It has since seen a steady decline It hit its 52-week low price of $2.92 on December 3, 2019, and high of $16.45 on December 4th, 2018.


Source: FactSet
My Takeaway

CDEV was pitched on April 12, 2019 and added to the AIM Equity Fund at $9.21 with an initial price target of $11.80. CDEV’s stock price has since significantly fallen and is now currently trading at $3.41. My recommendation for this stock would be to sell since it is nowhere near reaching its price target and is seeing a continuous decline. Admittedly, CDEV has been increasing revenue and meeting the goals and expectations set forth by management, however these changes being made are not being reflected in the stock price and should therefore be sold from the AIM fund.

Source: FactSet